The policy would aim to ease congestion and pressure on infrastructure in Australia's two biggest cities while boosting regional areas, the BBC quoted Population Minister Alan Tudge as saying on Tuesday.
At present, about two-fifths of Australia's 25 million people live in Sydney and Melbourne.
The government may introduce visa conditions to limit where some migrants live for up to five years, Tudge said. The proposal was not detailed at this stage, but such visas could carry a "geographical requirement... for at least a few years".
Some experts have questioned whether the idea was enforceable and achievable, the BBC report added.
Though Australia's population growth rate ranks 77th globally, according to the World Bank, it is high among the Organisation for Economic Co-operation and Development (OECD) nations -- rising by 1.6 per cent in 2017.
The growth has been largely migration-driven, with most people settling in Melbourne, Sydney and south-east Queensland, according to the government.
"Settling even a slightly larger number of new migrants to the smaller states and regions can take significant pressure off our big cities," Tudge said in a speech on Tuesday.
Other incentives would also be offered, Tudge said, in the hope that migrants would remain in regional areas permanently.
He also made it clear that the visa restrictions would not extend to migrants on family reunion or employer-sponsored visas, he said.
The Labour opposition said the idea could be considered, but raised concerns about its lack of detail.
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